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The digitisation of ownership

People have different opinions about the cryptocurrency Bitcoin, but the technological revolution that it spawned is fundamentally changing the worlds of society and business. In some blockchain-related matters, Switzerland is further ahead than California.

By Simon Zwahlen

Remember Napster? Founded in 1999, the exchange platform for files, especially music, set the world ablaze. It allowed users to share audio files with each other, thereby undermining the copyright placed on them. Nobody talks about Napster anymore, but the concept of playing music from the Internet has virtually supplanted traditional record sales. Nowadays, services like Spotify or Apple Music dominate the market. They are perfectly legal and reliably deliver royalties to artists, record labels and copyright-holders. Digital distribution models have even got sales back on track: according to initial forecasts, the market grew by 8.2 percent in 2018.

What Napster was for the music industry, Bitcoin is the same on a much larger scale for the rest of the business world: the first spark of a big idea. Initially, it lurked on the fringes of legality, a pirate, an anarchist, with potential for abuse. However, it became increasingly well-established over time, as entrepreneurs discovered ways in which the technology could be used to enhance business models.

Some investments fizzle out

The legend surrounding the founding of Bitcoin is well-known: a programmer who remains unidentified to this day, disillusioned by the turbulence of the financial crisis, takes on the pseudonym Satoshi Nakamoto and wonders how he could digitise cash and make intermediaries superfluous. He invents an intricately simple mechanism, where each payment is written in a digital transaction ledger that runs in parallel on countless computers. Encryption technology is used to connect each payment to the previous one so that the transaction ledger, linked and copied countless times, cannot be amended retrospectively.

As you probably already know, this technology is called the blockchain and is one of the hottest topics in Silicon Valley. When I came to California at the end of 2016, artificial intelligence was taking centre stage. Along with the hype surrounding Bitcoin and Initial Coin Offerings (ICOs), interest in the blockchain has grown exponentially. At the crest of this wave, I sat next to a seasoned venture capital investor at a start-up meeting. He asked me – the man from Switzerland – how he could invest in this "big new thing". Obviously, he was willing to spend a chunk of his million-dollar bank balance on a topic he had little understanding of. It is not surprising that exaggerations were made, with some even verging on fraud. Part of the way Silicon Valley works is that some investments fizzle out. But the ones that are successful? They change the world.

Now, the technology has entered a new phase. The wheat has been separated from the chaff and the most grossly inflated exaggerations seem to be a thing of the past. Last year, the value Switzerland’s 50 largest blockchain companies fell from $44 billion to $20 billion.

Meanwhile, the technology has positioned itself at the heart of the worlds of science and business. Blockchain specialists are almost as in demand as data scientists. At the universities of Stanford and Berkeley, some of the hottest student clubs focus on the subject. Car manufacturers are developing technologies that let self-driving cars communicate with each other via a blockchain. Large financial institutions are creating their own blockchains for reciprocal cash flows in the interbank market. Swisscom is working on an end-to-end solution for registering, storing and transferring digital assets via the blockchain.

While Silicon Valley is a leader in research, Switzerland's strength lies elsewhere. A buzzing ecosystem of blockchain companies more focused on implementation has emerged in the country – especially for financial applications. The region known as "Crypto Valley" in Zug is raising the bar in this regard, and has even become well-known in California. Due to the high costs in the San Francisco area and the fierce competition for talent, many young companies are looking for alternative locations. Switzerland’s biggest asset is its moderate regulation in the field of digital finance, with the Swiss Financial Market Supervisory Authority (FINMA) having earned the trust of blockchain experts worldwide. The blockchain can be used in a wide range of applications, but I see the greatest potential in the following areas:

– Digital assets and smart contracts:

A blockchain can be used to map out ownership structures and transfers. Swisscom founded the start-up Daura last year in collaboration with MME, a leading Swiss law firm in the blockchain sector. This allows small and medium-sized companies to issue shares via a blockchain and to have them registered in the share register at the same time. The launch is scheduled for the first quarter of 2019.

– The Internet of Things (IoT) and supply chains:

It is often critically important that you can seamlessly track the path of a product, whether as part of the ongoing development of the Internet of Things, or along supply chains in logistics and manufacturing. Blockchain technology is perfectly suited to this, especially when it involves a large number of parties around the globe.

– Digital identity:

Encrypted and with the right structure, the blockchain can help to protect a person’s digital identity from being abused. Moreover, an individual is always clearly identifiable, as all their transactions are permanently recorded in the blockchain.

– Sovereign registers:

The blockchain can be used as a replacement wherever data has previously been stored in a central database. This also applies to sovereign registers which need to be utterly tamper-proof, such as the land register, the criminal register or the tax register. Sensitive entries can be recorded in a private blockchain to which only authorised users have access. Compared to today's server and database solutions, this significantly increases security. Swisscom is working with Swiss Post to create blockchain infrastructure for Switzerland – and, by extension, for Swiss public authorities.

"Tokenisation of the world"

Generally speaking, this development makes central clearing houses, intermediaries and databases superfluous. The technology facilitates the transfer of ownership, and reduces its cost. However, the blockchain’s effects even extend to physical items. The term "tokenisation of the world" refers to the use of a token to link tangible items to a blockchain, and many key figures in Silicon Valley expect the blockchain to permeate the physical world in this way. If every item can be tied to a digital financial product, this not only leads to limitless possibilities for rental and leasing models, as well as the sharing economy: cash will die out and we will be able to transfer everything digitally.

Five questions

Simon Zwahlen: Vice President of Business Development & Innovation at Swisscom in Palo Alto, California.

When did you first become involved with Bitcoin?

Unfortunately, I'm not one of the people who bought the currency when a Bitcoin cost about as much as a pizza. But of course, as part of my job, I have had some experience with cryptocurrencies.

You often hear people say, "you can forget about Bitcoin. It’s only the blockchain technology that’s relevant."

That's not the whole story. To tokenise physical goods, you need an underlying value in the form of a cryptocurrency. However, this cryptocurrency could also be tied to a paper currency.

How is the blockchain changing our life?

Artificial intelligence has had much more immediate effects in the form of completely new experiences and products. By contrast, as a consumer, you don’t necessarily notice much of the blockchain. Things were similar with the cloud. Today, we use cloud-based features every day, but hardly anyone has a detailed understanding of how it works – instead, the technology does its thing in the background. Nevertheless, by going after trusted intermediaries and central clearing houses, it is certainly having a major impact on the economy, which is already visible in the financial industry.

In your opinion, will every item, down to a single chair, be mapped digitally with a "token" in the future?

Not in the next year or two. But in the long run, I’m sure that the "tokenisation" of the real world will make enormous progress. The biggest problem is clearly identifying physical items. Often you can use chips, but how do you link a banana, say, to a token?

What is the biggest factor slowing down the growth of crypto start-ups in Switzerland?

It’s very difficult to get work permits for crypto specialists. In many cases, these individuals come from third countries outside the EU, which are subject to relatively strict quotas.

The interview was conducted by Florian Schwab.

Glossary

– Blockchain: A database (or spreadsheet) shared on different computers across a network. A transaction is known as a block, and each block gets the fingerprint of the previous block, hence the name "chain".

– Data scientists: Data scientists are the most sought-after profession in Silicon Valley. They handle the collection and analysis of data, such as for big data applications.

– Initial Coin Offering: The first issue of a new digital currency (coin), with the term being inspired by the phrase "initial public offering".

– Smart contract: A digital contract based on the blockchain. When the contract is concluded, one or more if-then conditions are defined, and when they occur, an asset transfer takes place.

– Token: A tradable blockchain-based digital asset.

Swisscom tracks what’s going on in the digital world around the globe, with their network stretching from Shanghai to Silicon Valley. Simon Zwahlen is one of their leading specialists. He provides Weltwoche with first-hand monthly reports on the hottest trends and most fascinating developments.